With the recent increase in reverse mortgage rates and lower premiums from the secondary market, originators are are finding it increasingly difficult to make enough on their loans without charging an origination fee.

In past years, brokers saw back end pricing increase and were able to pass some of that money along to the consumer, by forgoing origination fees. Waived fees were commonplace and became expected by those applying for reverse mortgages. Not anymore.

“We’re making nothing on the back end, so we’re forced to have fees,” says Teague McGrath, vice president of marketing for Orange-Calif.-based American Advisers Group (AAG). “We can’t survive on the [current prices]…we are forced to do something.”

McGrath says origination fees are already being reintroduced throughout the industry, and they are making it very difficult for private lenders to compete with big banks. “It drives a wedge between us and them,” says McGrath.

AAG, which posted 658 reverse mortgages in 2010, may have a different take from that of smaller industry players.

“I don’t think the fees made a big difference to our business. It’s six of one, half dozen of the other,” says Mike Gruley, of Plymouth, Mich.-based 1st Financial Reverse Mortgages. “Even though we commonly see in the media that reverse mortgages are expensive, our experience is that consumers are not swayed by the cost; they’re swayed by not knowing how it works.”

Additionally, brokers are waiting to see how they will be affected by new loan officer compensation rules expected to take effect on April 1. A recent webinar by the National Reverse Mortgage Lenders Association on the topic of loan officer compensation discussed the new rules, how they will potentially impact lenders and brokers, and acknowledged that there are still questions remaining, pending clarification from the Federal Reserve.

Several trade groups have requested that the Fed delay the effective date of the compensation guidelines, but during the webinar, NRMLA counsel Jim Milano said the association does not believe an extension is likely beyond April 1.

When has there been a single month where there have been no origination fees charged on HECMs? Yes, during the very short lived heydays of some proprietary reverse mortgages there were some reverse mortgages originated without them. Then when fixed rate HECMs grew in popularity in the investor community, many were originated without such fees. Now a high percentage of adjustable rate HECM Savers are being originated without such fees.

The history of the industry is that there has never been a single fiscal year where the majority of HECMs were endorsed with no origination fees. Whoever is spreading that rumor should cease.

The issue is not whether HECMs are being originated without origination fees but it is rather what percentage of HECMs have no origination fees and what percentage are originated with reduced fees. Now that would be valuable information, especially if it had detailed breakdowns.

Anonymous

As I cautioned in “Spring Sale in Reverse Country” less than a year ago (http://thinkreverse.com/blog/2010/04/), the mindless race-to-the-bottom in HECM fees was (and is) a strategic blunder. Industry credibility is at stake. Seniors have long memories.

Anonymous

its only a matter of time Critic that we start charging you for commenting on every single article John posts…

Anonymous

LLoydC – I like your sense of humor but don’t ever expect to get the last word!

Anonymous

I agree with Mr. McGrath. Banks continue to earn back end revenues through secondary market execution. Banks are also allowed to hedge market risk through forward sales or other means while brokers aren’t, but only because the banks don’t allow brokers to execute longer term locks like they can with traditional mortgages (why not?). Wells Fargo is able to charge no origination fee on ARMs, I believe because they earn rebates on subsequent line of credit draws, while banks don’t share that revenue with brokers. This is all further evidence of the damage the April 1 ruling on broker comp will do to small business. Thousands of small businesses will be forced to close for no good reason if the April 1 ruling as written becomes reality. These small businesses exist for a reason, and deserve an even playing field.

The_Critic

LloydC,

treverse is wise beyond his years.

The_Critic

Atare,

I agree.

Where seniors have suffered is that interest rates significantly below the floor were not offered on fixed rate HECMs when back end profits were so high. When it comes to interest rates, the rest of this comment is directed at the problem of charging interest based first on market demands but then holding it to or near floor rates when a lower rate was more appropriate.

However, what was also mindless was the action by Ken Scholen trying to cut origination fees in HERA. While he did not get all he wanted (1% of principal limits), he got far more than he should have. I do not believe that people like Ken realize that bankers know how to make profits. He has always seemed very naive.

What Ken never envisioned is what is happening now. Further he harmed seniors by pushing lenders to pursue higher note interest rates to make up for the losses in origination fees. Don’t people like Ken realize that when they push on one side, lenders will find another way to make up for it and at times the loss is to seniors? Lenders have to make even higher profits now on a loan with such tremendous contingent liabilities in Ginnie Mae securitization.

To most seniors higher interest rates are a “hidden cost.” I know some will point to the amortization schedule declaring that the impact of interest is not hidden. Sure amortization schedules show costs but only the costs at one interest rate. Not only do higher interest costs increase the costs of interest but it also increases the cost of ongoing MIP which lenders do not benefit from. When this rate is higher as it is now, the actual dollar amount multiplies.

Anonymous

Not sure where this issue is headed, but at the moment I feel very uneasy. I have recently lost many deals to the “Big Players” (retail) charging no origination fee. With the volatility of pricing in wholesale, I’m not sure how to properly disclose my deals and still remain competitive. I’m relying on my wholesalers to come up with a solution to even out the playing field. We’ll see…….

Anonymous

The_Critic,

Here I thought LloydC had a real point but then I checked and there are whole lot of articles by John you failed to comment on. You have a lot of writing to catch up on. Get a move on.

How disappointing!!!

Anonymous

Regguy1,

You mean just like the NMLS requirements? Oops, I guess that isn’t such a good example after all.